World Economic Situation and Prospects 2012: Update as of mid-2012 docx

After a marked slowdown in 2011, global economic growth will likely remain tepid in 2012, with most regions expand-ing at a pace below potential.. An escalation of the crisis would lik

and Prospects 2012

Update as of mid-2012

United Nations

New York, 2012

and Prospects 2012

Despite scattered signs of improvement, the world economic situation and

prospects continue to be challenging After a marked slowdown in 2011, global

economic growth will likely remain tepid in 2012, with most regions

expand-ing at a pace below potential In the face of subdued growth, the jobs crisis

continues, with global unemployment still above its pre-crisis level and

unem-ployment in the euro area rising rapidly The risks to the global outlook are tilted

to the downside The euro area debt crisis remains the biggest threat to the

world economy An escalation of the crisis would likely be associated with severe

turmoil on financial markets and a sharp rise in global risk aversion, leading to

a contraction of economic activity in developed countries, which would spill

over to developing countries and economies in transition A further sharp rise

in global energy prices may also stifle global growth National and international

concerted policies should be enacted on multiple fronts in order to break out

of the vicious cycle of deleveraging, rising unemployment, fiscal austerity and

financial sector fragility in developed economies Breaking this cycle requires

policy shifts away from fiscal austerity and towards more counter-cyclical fiscal

stances oriented to job creation and green growth These policies need to be

better coordinated across the major economies and concerted with continued

expansionary monetary policies in developed countries, and accompanied by

accelerated financial sector reforms and enhanced development assistance for

Global macroeconomic trends 1

Global growth projected to slow, major risks looming 1

The jobs crisis continues 1

Non-oil commodity prices projected to recede, but oil prices remain high 4

International capital flows: the calm before the storm? 5

Volatility in currency markets has eased for now 5

Regional outlook 6

Developed economies 6

Economies in transition 7

Developing economies 8

Risks and uncertainties 11

Escalation of the euro area crisis is the biggest threat to global growth 11

High oil prices pose significant downside risks for the world economy 12

Policy recommendations 13

Reorienting and coordinating fiscal policies 13

Aligning macroeconomic and structural policies for job growth and sustainable development 14

Addressing financial market instability 14

Ensuring adequate development finance 15

Dealing with the jobs crisis through benign global rebalancing 16

Annex 18

Figures 1 Unemployment rates in selected developed countries: January 2007–February 2012 3

2 Brent oil price: January 1980–March 2012 4

3 Internationally coordinated strategy for growth and employment 17

Tables 1 Growth of world output, 2006–2013, annual percentage change 2

A.1 Employment Growth Scenario: main outcomes by groups of countries 20

Global macroeconomic trends

Global growth projected to slow, major risks looming

Despite some scattered signs of improvement in recent months, the world economic

situ-ation and prospects continue to be challenging After a marked slowdown in the course

of 2011, global economic growth will likely remain tepid in 2012, with most regions

expanding at a pace below potential In the baseline outlook, world gross product (WGP)

is projected to grow by 2.5 per cent in 2012 and 3.1 per cent in 2013, following growth

of 2.7 per cent in 2011; this constitutes a slight downward revision from the forecasts

presented in the World Economic Situation and Prospects (WESP) 2012 in January (see

table 1) Downside risks for further weakening of global economic conditions remain

unabatedly high

Most developed economies are still struggling to overcome the economic woes

originating from the financial crisis Four major weaknesses continue to feed into each

other and conspire against any robust economic recovery: First, continued deleveraging

by banks, firms and households is holding back normal credit flows and consumer and

investment demand Second, unemployment remains high, a condition that is both cause

and effect of the lack of economic recovery Third, fiscal austerity responses to deal with

rising public debts are further deterring economic growth, which in turn is making a

return to debt sustainability all the more difficult And fourth, bank exposure to sovereign

debts and the weak economy are perpetuating financial sector fragility, which in turn is

spurring continued deleveraging

Developed countries, especially in Europe, continue to struggle to break

through this vicious circle Even if further deepening and spreading of the euro area’s

debt crisis can be avoided, as assumed in the baseline scenario, economic activity in the

European Union is projected to stagnate in 2012 The outlook is not as sombre for the

United States and Japan, although in both countries output growth continues to be

con-strained by ongoing deleveraging and policy uncertainties

As a result, world trade growth will slow further to 4.1 per cent in 2012, down

from 13.1 per cent in 2010 and 6.6 per cent in 2011 Faced with weakening external

demand and increased global uncertainties, developing countries and economies in

transi-tion are projected to see notable output growth moderatransi-tion to, respectively, 5.3 per cent

and 4.0 per cent in 2012 Economic growth in these economies is forecast to pick up

slightly thereafter, assuming global demand recovers in 2013 and downside risks do not

materialize

The jobs crisis continues

Recovery of global employment remains the most pressing challenge Despite moderate

improvements in some countries once positive economic growth resumed by 2010, the

marked slowdown of global growth in the course of 2011 has posed new hurdles for

employment creation Employment-to-population ratios remain below their 2007 levels

in all major economies, except Brazil, China, and Germany By the end of 2011, an

estimated 48 million additional jobs were required for employment ratios to return to

pre-crisis levels In almost all developed countries, employment was lower at the end of

2011 than in 2007 and the jobs deficit among these countries tops 12 million In many

Table 1

Growth of world output, 2006 – 2013, annual percentage change

Change from January 2012 forecast

c Forecast, based in part on Project LINK.

d Includes goods and services.

countries, this is also reflected in high and still rising unemployment rates (figure 1) In

the United States, despite recent improvements, the unemployment rate remains high at

over 8 per cent, well above pre-crisis levels Almost all European countries faced greater

unemployment rates at the end of 2011 than in 2007, except Austria and Germany The

unemployment rate in the euro area as a whole increased to a historic high of 10.9 per

cent in March 2012, up by one percentage point from a year ago It reached alarming

heights in the debt-ridden euro area countries: in Spain it jumped to 24.1 per cent in

March 2012 (up from an average rate of 8.6 per cent in 2007), in Greece to 21.7 per cent

(up from 8 per cent), in Portugal to 13.5 per cent (up from 8.5 per cent), and in Ireland

to 14.5 per cent (up from 5 per cent) Furthermore, long-term unemployment continues

to increase in many developed countries, reaching 40 per cent of the unemployed in

about half of these countries Most notably, the share of long-term unemployed rose

significantly in the United States, the United Kingdom, and debt-distressed countries

of the euro area.1 Youth unemployment also increased markedly; most staggeringly in

Spain, where more than half of young adults looking for a job cannot find one

By contrast, in developing countries, employment rebounded, on average,

more strongly than elsewhere However, with growth in major developing economies

slow-ing, the prospects for sustained improvements are uncertain At the end of 2011, many

countries in South Asia (including large countries like India), Western Asia (particularly

those affected by political instability), Africa (including South Africa) and Latin America

(including Mexico and Venezuela), faced large job deficits compared to 2007 In both East

Asia and Latin America, employment creation decelerated, with unemployment increasing

1 See International Labour Organization, World of Work Report 2012, pp 2-4.

Figure 1

Unemployment rates in selected developed countries: January 2007 - February 2012

5 10 15 20 25

Source: UN/DESA, based

on OECD Main Economic indicators.

in Brazil during the first quarter of 2012, although the rate of unemployment is still lower from where it was a year ago Continued high rates of underemployment, vulnerable em-ployment, low wages, and absence of social safety nets prevail in most countries, though involuntary part-time underemployment in Latin America and East Asia seems to have reduced marginally.

Non-oil commodity prices projected to recede, but oil prices remain high

World market prices of primary commodities declined markedly in the second half

of 2011, but were on the rise again in early 2012, especially oil prices After rising by

40 per cent to reach an all-time high average yearly price of $111 per barrel (p/b) in 2011, the Brent crude oil price increased further, oscillating around $120 p/b in April 2012 (figure 2) The surge was triggered by bans imposed by the EU and the United States on oil imports from the Syrian Arab Republic and the Islamic Republic of Iran,2 as well

as by speculation about escalating geopolitical tensions in the region In the baseline outlook, assuming no escalation of such factors, the price of Brent crude is forecast

to average $110 p/b in 2012 and $100 p/b in 2013 Metals prices are expected to fall moderately in 2012 as industrial output slows in China and the euro area faces reces-sion Food prices have come down from the highs of 2011, but remain elevated Further easing is expected in the second half of 2012 and 2013

2 See European Union Council Decisions 2011/522/CFSP of 2 September 2011 and 2012/35/CFSP of

23 January 2012 for the EU bans of Syrian and Iranian oil imports and Executive Orders 13582 of

18 August 2011, and 12959 of 6 May 1995 for those imposed by the United States.

Figure 2

Brent oil price: January 1980–March 2012

US$ per barrel; real price = nominal price deflated by the United States consumer price index

0 20 40 60 80 100 120 140

Jan-1980 Jan-1982 Jan-1984 Jan-1986 Jan-1988 Jan-1990 Jan-1992 Jan-1994 Jan-1996 Jan-1998 Jan-2000 Jan-2002 Jan-2004 Jan-2006 Jan-2008 Jan-2010 Jan-2012

Source: UN/DESA, based

on IMF International

Financial Statistics.

These trends are expected to contribute to a further moderation of inflation

worldwide Volatility in commodity prices will remain a concern for net commodity

ex-porters and imex-porters alike Geo-political factors may push oil prices to even higher levels,

posing an added downside risk to the world economic outlook (see below)

International capital flows: the calm before the storm?

After much turmoil during 2011, global capital markets regained some stability in early

2012 as concerns over an escalation of the euro area crisis and the possibility of a hard

landing of the Chinese economy eased (at least for now), and growth prospects in the

United States seemed to have improved During the first quarter of 2012, most emerging

economies have seen less volatility in private capital inflows, more moderated swings in

exchange rates and modest stock market gains For 2012 as a whole, total net private

capital inflows to emerging countries are projected to be positive, though somewhat below

2011 levels

Present conditions contrast sharply with those of the second half of 2011, when

contagion from the turbulence in the euro area caused a sudden drop in capital flows

to emerging and other developing economies In an effort to strengthen their balance

sheets, banks, especially in Europe, reduced their exposure to these markets As a result,

borrowing costs increased, asset prices fell, and currencies depreciated in many emerging

and other developing economies

Yet, the current calm may be deceptive and new turmoil may surface easily

Capital inflows to these economies are likely to stay volatile, complicating macroeconomic

policymaking Push and pull factors will underlie the continued volatility On the one

hand, the significant differences in economic growth and interest rates between emerging

and developed economies will push more capital towards emerging economies On the

other hand, the continued deleveraging by European banks carries the risk of disorderly

balance sheet adjustments, which could trigger massive withdrawals of capital from

emerg-ing economies

Governments of emerging and other developing economies markets thus will

need to further strengthen regulatory measures and buffers to shield themselves against

continued capital flow volatility Strong reserve positions and capital account regulatory

measures helped countries to come relatively unscathed out of the financial turmoil of the

second half of 2011: banks survived the storm, while the sharp reversal in capital inflows

did not seem to have affected economic activity too much

Volatility in currency markets has eased for now

Volatility in international currency markets also eased in early 2012, following large

fluctuations in exchange rates during 2011 During the first quarter of 2012, most major

currencies have traded in fairly narrow ranges, with the euro-dollar exchange rate hovering

around 1.32 Shifting risk perceptions, depending on trends in fiscal balances and output

growth, are expected to cause fluctuations in the value of the euro vis-à-vis the dollar in the

near term The Japanese yen, which reached historical highs against all major currencies in

2011, depreciated significantly in early 2012 after the Bank of Japan set an inflation target

of 1 per cent and expanded its asset buying program Meanwhile, the gradual appreciation

of the renminbi against the dollar has—at least—temporarily come to a standstill, with

the exchange rate remaining close to 6.30 CNY/US$ since January 2012 The Brazilian real weakened markedly against major currencies in recent months after the Government implemented measures to prevent further appreciation

Regional outlook

Developed economies

The economy of the United States started 2012 on a positive note Job creation exceeded

expectations, stock market indices registered solid gains, credit conditions eased notably, while also consumer confidence and spending increased markedly Economic activity is expected to grow by 2.1 per cent in 2012 and 2.3 per cent in 2013, a slight upgrade from the previous forecast and above the 1.7 per cent recorded in 2011 However, the economy

is not out of the woods yet Despite falling labour participation, the unemployment rate remains much higher than it was before the crisis and, in April, job creation slowed again

to below the level needed to absorb the natural increase of the labour force The number

of workers without a job for more than six months continues to increase Weak ment conditions, along with the continued weak housing market and risk of foreclosures, are holding back consumer spending With the phasing out of fiscal stimulus measures injected during the crisis, government spending has declined, dragging output growth The upcoming presidential election creates uncertainties over the fiscal policy outlook, clouding overall economic prospects

employ-In Japan, the economy is expected to recover moderately in the outlook period

Gross domestic product (GDP) contracted by 0.7 per cent in 2011 Economic activity is projected to grow by 1.7 per cent in 2012 and 2.1 per cent in 2013 The recovery from the earthquake and tsunami that hit the country in March 2011 was hampered by sup-ply chain disruptions in the fourth quarter caused by the flooding in Thailand, a major supplier of manufactured inputs Quarter-over-quarter GDP growth stagnated in the last quarter of 2011, a major reversal after the 7.6 per cent annualized growth rate posted in the third quarter In 2012, private consumption growth is expected to remain moderate owing

to sluggish growth in wage income Reconstruction works are expected to spur investment growth This impulse is being partly offset, however, by cuts in other government expendi-tures and a tax increase The measures are to address concerns over the large budget deficit and Japan’s outsized public debt As in 2011, falling net exports will drag GDP growth In particular, fuel imports will increase further because of the need to substitute energy with the phasing-out of nuclear power generation

The recovery in Western Europe came to a halt in the fourth quarter of 2011

with GDP declining sharply in most countries In 2012, GDP is expected to contract

by 0.3 per cent, after growing by 1.5 percent in 2011 Only a modest rebound of 0.9 per cent is expected for 2013 This deterioration stems mostly from the impact of the euro area debt crisis, coupled with a slowing of international demand, and high energy prices The debt crisis has resulted in increasingly stringent fiscal austerity programmes in those countries facing acute financing difficulties, has weakened the banking system in the region and raised uncertainty to such an extent that confidence is falling In early 2012, several massive ECB policy actions, an agreement by EU heads of state on a new fiscal architec-ture, and a successful write-down of Greek debt led to some calming of financial markets Nevertheless, the outlook is sombre and growth projections have been revised downwards

from that in WESP 2012 With ongoing deleveraging, a weak and vulnerable banking

sys-tem, slowing external demand, high unemployment, fiscal tightening, and high oil prices,

prospects for growth are bleak The aggregate picture masks important differences across

the region Germany’s economy, for example, is expected to grow by 1.0 per cent in 2012,

while the crisis-struck economies of Greece, Italy, Portugal and Spain will remain mired

in recession The poor growth performance has led to a significant increase in

unemploy-ment, as indicated For the euro area, average unemployment is expected to increase from

10.2 per cent in 2011 to 11.1 per cent in 2012 and stay high at 11.0 per cent in 2013 Again,

significant regional differences are apparent: with unemployment high and increasing in

the crisis-struck countries, but more stable (and even declining in some) and significantly

lower in other countries

The recovery in the economies of the new EU member States in Central and

Eastern Europe is expected to slow noticeably in 2012, affected by weakness in their major

export markets and by contractionary effects of fiscal austerity policies GDP growth is

expected to slow, on average, from 3 per cent in 2011 to just 1.7 per cent in 2012, before

strengthening to 2.8 per cent in 2013 Some countries, such as Hungary, may slip back

into recession Poland’s economy is less export-dependent and, as a result, may escape

a sharp slowdown Domestic demand will not support growth in 2012 owing to fiscal

tightening, weak labour markets, private sector indebtedness and stagnating credit flows

Consumer confidence remains fragile as fiscal austerity measures encompass wage and

employment reductions in the public sector The slowing growth will delay the recovery in

employment Inflation in the new EU member States should subside in 2012, as pressures

from world oil and food prices and VAT increases are expected to fade Possessing weak

fiscal buffers, the new EU members remain vulnerable to the risk of massive deleveraging

by parent banks of the EU-15 should the euro area crisis worsen

Economies in transition

After growing at a robust pace in 2011, the economies of the Commonwealth of Independent

States (CIS) are expected to see a mild slowdown in the outlook period Output is projected

to expand by 4.3 per cent on average in 2012, compared with 4.8 per cent in 2011 For

major energy-exporters in the region, such as the Russian Federation and Kazakhstan,

growth in 2011 was predominantly driven by higher commodity prices, especially oil and

natural gas Most other CIS economies, including those in Central Asia, also benefited

from higher commodity prices and growth was further spurred by increased public

infra-structure spending and worker remittances Strong agricultural output also contributed

to growth throughout the CIS In the outlook for 2012, the economy of the Russian

Federation is forecast to expand by about 4 per cent, contingent on oil prices staying at

pres-ent high levels However, during 2011, the economy experienced near record level capital

outflows, triggered by uncertainty and negative sentiments among investors The flight of

capital continued in early 2012, tempering growth prospects In most other CIS economies,

growth is expected to moderate in line with lower commodity prices and tighter fiscal

policies Inflation in the CIS countries is set to moderate in 2012, after accelerating in 2011

on the back of higher food and fuel prices, rising wages, and, in some cases, massive foreign

exchange inflows The slowdown in inflation will be beneficial for private consumption In

response to lower inflation, several central banks in the CIS cut policy rates in early 2012

The economies of South-Eastern Europe are expected to stagnate in 2012, with

Croatia likely to fall back into recession Economic activity in South-Eastern Europe is

expected to expand by a mere 0.6 per cent in 2012 Growth is forecast to accelerate to 1.8 per cent in 2013 as domestic demand, especially private investment, strengthens The region recovered somewhat in 2011 from the consequences of the global financial crisis, owing to a recovery in demand for commodities (metals in particular), a successful tourism season and a modest recovery in worker remittances Growth of manufacturing output and construction activity weakened, however, in late 2011 and early 2012 owing

to weaker external demand and a harsh winter In 2012, against the backdrop of the sluggish EU economy, export growth will likely remain slow, especially given the region’s strong trade ties with Greece and Italy In addition, weak employment conditions, lower public sector wages, fiscal tightening, sluggish credit growth and private sector indebted-ness continue to restrain domestic consumption and investment The planned boost to public investments in infrastructure and energy, financed through EU support and other international resources is to provide some counterweight In 2012, inflation in most of the region is forecast to be in the low single-digits The region remains dependent on external finance, and the large presence of Greek banks in parts of the region entails the risk of capital outflows An abrupt decline in remittances, triggered by a deeper crisis in the EU, would stifle private consumption

Developing economies

Economic growth in Africa will remain solid in the outlook period, but slightly below the

level forecast in the WESP 2012 The region is expected to see its GDP grow by 4.2 per cent

in 2012 and 4.8 per cent in 2013, a downward revision by 0.8 and 0.3 percentage points, respectively, from the previous forecast Lingering global economic uncertainty stemming from the slowdown in Europe and some large developing countries will weigh on exports and lead to more cautious investment, especially in the infrastructure and resource sec-tors In addition, political instability and uncertainty drag economic growth in countries like Libya and Egypt The service sector remains strong in many economies, including Nigeria and Ghana, where the telecommunications and construction sectors are expected

to continue to show robust growth Domestic consumption demand has strengthened in many countries in the region as well In Kenya, for example, retail trade has expanded by almost 50 per cent over the past 6 years and this trend is likely to continue Public and private investment in the natural resource and infrastructure sectors will continue to grow

at a solid pace in several countries However, infrastructural deficits, especially in terms

of energy generation and refining capacity, continue to impede acceleration of growth and development in most countries in the region Meanwhile, added production capacity, as

in Sierra Leone, and still elevated commodity prices are expected to underpin a continued solid performance in the resource sectors across the region Important downside risks are associated with stronger-than-expected commodity price weakening, that would result from a more pessimistic scenario playing out for the developed economies While inflation rates are forecast to moderate, they remain high in much of sub-Saharan Africa They are still well into the double-digits in a number of countries, for example, Ethiopia, Nigeria, Tanzania, and Uganda; this is curbing purchasing power and, hence, consumption spend-ing Next to commodity price fluctuations, the prospect of renewed droughts poses a major risk to the outlook and could spark the re-emergence of severe food shortages

Weak demand in developed countries and a slowing Chinese economy are

likely to weigh on economic growth in East Asia in the outlook period After decelerating

from 9.2 per cent in 2010 to 7.1 per cent in 2011, average regional growth is expected to